MONTHLY MARKET INSIGHT

MAY 2014 KEY TOPICS TO WATCH (MAY)

FOMC Chairwoman Yellen Speech (1st) Markit Manufacturing PMI (2nd) Markit PMI Services (Apr) (6th) US Non Farm Payrolls (Apr) (7th) ECB Interest Rate Decision (May) (8th) BoE Interest Rate Decision (May) (8th) Eurozone CPI (Apr) (15th) S&P/Case Schiller HPI (Mar) (27th) US Q1 GDP Annualised Final (29th)

U.S. FUNDAMENTAL OVERVIEW

This months FOMC meeting has once again prompted more questions than answers with a cautious tone noted in the minute releases, contrary to much FOMC member conjecture regarding interest rate rises in previous months. The rate of tapering action has remained stable at a reduction of $10B bringing total monthly MBS and Treasury asset purchases to $45B. This shallow reduction rate is determined to a large extent by a lack of conviction in the US economic recovery and Q1 earnings results, both of which indicate that wholesale changes to monetary policy are ill-advised. The unstable state of the US economy was indicated by Flash Q1 GDP figures being much below anticipations at 0.1% compared to 1.2% expected (the lowest since Eurozone crisis in 2011). This has been blamed upon the poor weather by many sources, however it is important to note that Q1 saw the start of Federal Reserve tapering activities which has ended stimulus led growth for many sectors, such as housing. Upcoming Housing metrics like the S&P Case Schiller Index should indicate the impact of quantitative easing upon GDP growth, especially if a significant reduction occurs from the relatively high current index values of 165.35. Much like the shock Q1 GDP release, Q1 earnings season has so far shown a related weakness with an increased number of companies missing revenues targets (47% of total releases have missed estimates) even with climate factors accounted for. This has been counteracted with strong performance in the information technology and utility sectors, providing additional confusion over the true state of the US economy.

S&P 500 (APR 2014)

FTSE 100 (APR 2014)

Other data is mixed with definitive performance trends being sparse. Unemployment and CPI figures are improving at a slow rate with an unemployment rate of 6.6% and Consumer Price Index reading of 1.5%. Two large potential takeover deals announced in April (PfizerAstraZeneca, General Electric-Alstom) are indicative of an improved commercial outlook and is reflective of increased M&A activity by US firms in the past year with the volume of deals representing a buyers market, possibly due to use of the previous earnings gains seen by S&P 500 companies. Retail sales have also shown robustness over the last few months having risen 1.1% over March 2013 figures,

EUROPEAN FUNDAMENTAL OVERVIEW

Eurozone Consumer Price Index figures have been showing weakness for many months which has raised speculation of Quantitative Easing within the Eurozone, with repeated issuances by central bank members regarding being prepared to take action if necessary and observing key inflation and economic metrics. CPI data was stronger in terms of month on month performance (0.7% from 0.5% in March) but still missed expectations, suggesting that deflationary pressures and quantitative easing speculation will intensify further in May. Manufacturing strength has been maintained in April with Eurozone Markit manufacturing PMI rising to 54.0 from 53.1 representing a 35 month high. This has been aided by crisis nations (especially Spain) showing an increasingly stronger and broader economic recovery. In contrast Germany and France have shown mixed recovery data with France continuing to be a potential source of risk in 2014. Although developments in Ukraine have the potential to impact intraday price volatility due to sanctions, events and speculation. The focus is still political with escalations being confined to a political arena. In the absence of any open war declarations it is unlikely that worldwide stock market or European economic performance will be impacted significantly.

DAX 30 (APR 2014)

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The high price of the Euro relative to other currencies at 1.38-1.40 continues to present a greater relative risk to a full European recovery as global price competitiveness is eroded. Increased speculation regarding quantitative easing, and a continuation of the increased volatility levels seen in the currency markets in late April, could ensure that valuations finally break towards lower levels to provide the required reduction in price pressure. The UK economy is continuing to show strength although this appears to have been muted from growth levels seen in late 2013. Although there is no sign of significant economic weakness with Q1 GDP output figures just below expected figures at 0.7%. As a result, interest rate changes are still unlikely to happen in May. This article does not constitute as investment advice.